Bonanza Creek’s situation continues to sour
The situation for Bonanza Creek Energy (ticker: BCEI) continues to worsen, as the company announced Monday as part of its second quarter press release that it will not make a scheduled interest payment on its 5.75% senior unsecured notes, and that the company has decided to suspend its asset sales. The company has been fighting an uphill battle since the mid-2014 after senior management retired from the company, and commodity prices plummeted in November 2014.
Bonanza Creek’s initial public offering took place in December 2011, when the company sold 10 million shares at $17.00 each for a total offer amount of $170 million. In its first full year as a public company, Bonanza Creek reported production of 9.3 MBOEPD, and had a market capitalization of $1.1 billion by year-end 2012. The company would continue to grow to a market cap of $1.8 billion by 2013 before BCEI founder and former-CEO Mike Starzer retired from the company. After Starzer’s departure, Bonanza Creek’s market cap began to shrink despite continued production growth, and by July 15 of this year, the company announced it was “evaluating financial and transaction alternatives, including restructuring options,” just 55 months after its IPO.
Below are Bonanza Creek’s comments on the company’s liquidity and asset sale suspension.
Debt and Liquidity
The company has a $1.0 billion revolving credit facility, which was redetermined in May of 2016 to an approved borrowing base and commitment amount of $200 million. As of June 30, 2016, the Company had borrowings under its credit facility of $273.3 million and cash totaling $170.2 million. Upon redetermination of the company’s credit facility, its borrowings exceeded its borrowing base by $88 million. The company has elected to pay this deficiency in six monthly installments as allowed under the terms of the credit facility agreement. During the quarter the company paid off its remaining $12.0 million letter of credit and made its first credit facility deficiency payment of $14.7 million. The company has subsequently paid its second deficiency payment of $14.7 million in July and has four remaining payments to be made on a monthly basis to remedy its credit facility deficiency. The company’s next redetermination is expected to happen in the fourth quarter of 2016. As of June 30, 2016, the company was in compliance with all financial covenants under its credit facility, with a senior secured debt to TTM EBITDAX ratio of 1.5x, an interest coverage ratio of 3.2x, and a current ratio of 2.7x.
In addition to the credit facility, Bonanza Creek has two outstanding issues of unsecured high-yield bonds which consist of $500 million of 6.75% senior notes due in 2021 and $300 million of 5.75% senior notes due in 2023. The company is subject to certain covenants under the respective indentures governing the senior notes that, among other things, limit its ability to incur additional indebtedness. Specifically, the incurrence by the company (or any of the guarantors under the indentures) of additional indebtedness and letters of credit under the revolving credit facility in an aggregate principal amount at any one time outstanding is not to exceed the greater of (a) $300.0 million or (b) 35% of the company’s Adjusted Consolidated Net Tangible Assets (“ACNTA”) determined as of the date of the incurrence of such indebtedness. ACNTA is defined as the company’s PV-10 value plus capitalized costs for unproved properties plus consolidated net working capital and other tangible assets. At June 30, 2016, 35% of the company’s ACNTA was equal to approximately $380 million.
While the company currently has sufficient cash on hand to make its upcoming bond interest payment, it has made the election to not pay the interest payment for its $300 million 5.75% senior unsecured notes, which was due on August 1, 2016. By not paying the interest due, the company has entered into a 30-day grace period during which it retains the right to pay the interest due to the holders of its 5.75% notes and thereby remain within compliance of the bond indenture. The 30-day grace period also applies to any potential cross-default under the company’s credit facility with respect to the bond interest payment.
Asset Sale Processes – RMI and Mid-Continent
During the second quarter of 2016, the company re-launched a marketing effort to divest its RMI assets. The company engaged a third party advisor to assist in locating a purchaser for these assets by performing a widely marketed process. While the company received economically strong bids for the assets, they all contained significant conditions that required the company to remedy its debt burden and its limited access to capital. With regard to the MidCon assets, the company also performed a widely marketed process to divest the assets with the assistance of a third party advisor. Bids received for these assets also contained significant going concern representations resulting from the company’s liquidity constraints. Upon reviewing these bids, given the significant conditions and, in the absence of improvement to the company’s balance sheet, the unlikely sale for either package, the company’s management and board have decided to suspend these asset sale processes and focus efforts on alternative methods to reduce debt and increase liquidity.
Analyst Commentary
Capital One
• Negative. Bad news galore. BCEI suspended the RMI and Midcon asset sale processes indefinitely, it did not pay the ~$4.3MM interest payment that was due yesterday on its 5.75% bonds, it ended 2Q w/ $97MM of liquidity vs $139MM COS est due to heavy working capital and investing outflows, and COO Tony Buchanon resigned. BCEI is running out of viable options to remain solvent, especially if it cannot sell assets b/c potential buyers are spooked.
• The only silver linings are: 1) BCEI still has $170MM of cash, so it can easily pay the interest payment w/in the 30-day grace period and the ~$59MM of remaining deficiency payments; 2) BCEI made its first 2 of 6 monthly deficiency payments of $14.7MM needed to cure its overdrawn facility; 3) 2Q CFPS, EBITDA, & production were mildly above Street; and 4) FY16 cash cost & CAPEX guidance were cut.
• BCEI noted it received strong bids for both RMI and Midcon, but they required BCEI improve its liquidity and balance sheet and also contained “significant going concern representations.” This is understandable for the RMI package, considering its viability depends on the financial health of BCEI, but the Midcon package is vanilla, so we must conclude potential buyers are worried about potential fraudulent conveyance legal concerns if BCEI ultimately files Chapter 11. As previously disclosed, Perella Weinberg has been retained to assist in evaluating all alternatives.
• 2Q CFPS was 26c vs 25c/28c Street/COS. EBITDA was $28MM vs $26MM/$29MM Street/COS. Production was 1% above Street & COS and at the upper end of guidance. No conference call scheduled.
Johnson Rice
This afternoon BCEI announced that it has suspended its asset sale process (RMI/Mid-Con), despite receiving "strong economic bids" on both properties, as the offers were contingent on the company improving its debt burden. BCEI also elected to not make its 8/1 interest payment on its Notes due 2023, entering into a 30-day grace period. As a reminder, BCEI has retained a financial advisor, so look for the company to attempt to restructure its debt through a debt-for-equity swap, term loan, or other methods. As of the end of 2Q, the company had $170mm in cash, however it had $273mm outstanding on its revolver, $73mm overdrawn above the most recent redetermination. 2Q:16 CFPS came in at $0.26 versus consensus' $0.25 and our $0.28 and FY:16 production guidance was reaffirmed, however capex was dropped from $35-45mm to $25-35mm, and LOE & Midstream Expense was lowered from $67-73mm to $58-64mm. The company will not hold a conference call.
